1H24 service revenue and net profit are basically in line with our expectations

The company announced 1H24 results: operating income of 74.412 billion yuan, +1.7% year over year, of which service revenue was 72.855 billion yuan (excluding product distribution and IT equipment distribution revenue), +3.0% year over year; net profit to mother was 2.125 billion yuan, +4.4% year over year. Service revenue and net profit performance are basically in line with our expectations.

Development trends

Revenue from the customer acquisition market contributed to the main growth momentum, and the signing of new contracts in strategic emerging fields grew rapidly.

1H24, 1) Domestic non-operator customer attraction market revenue of 32.409 billion yuan, of which TIS/BPO/ACO were -3.6/+5.9/ +12.5% year over year, respectively, and the growth rate of new orders signed in the customer market was about 10%; 2) Carrier market revenue was 40.024 billion yuan, +0.1% year over year, of which TIS/BPO/ACO respectively increased by +1.9/-0.7/ -3.8% year on year; 3) Overseas market Revenue of 1.979 billion yuan, +26.0% year-on-year. We believe that on the basis of stabilizing traditional business, the company will further expand markets in strategic emerging fields. The amount of new contracts signed by 1H24 operators and the customer attraction market increased well year over year; the amount of new contracts signed in strategic emerging fields increased by more than 40% year over year, accounting for more than 35% of the total number of new contracts signed. Driven by the signing of new contracts, we believe that the company's 2H revenue growth rate is expected to pick up and revenue is expected to maintain steady growth throughout the year.

The gross margin of the customer attraction market and ACO business increased significantly. 1H24 gross profit margin was 10.9%, compared to +0.2ppt. The company's 1H24 gross margin continued to improve, mainly due to a significant increase in gross margin of software development and system integration in the customer attraction market and ACO business, and the stabilization of gross margin in the operator market. 1H24, direct employee costs, material costs, direct product distribution costs, subcontract costs, depreciation and amortization expenses were -1.6/+3.8/-34.7/+2.3/+4.8/ +3.0%, respectively; of these, R&D expenses were +11.1% in SG&A expenses, and SG&A expenses accounted for -0.2ppt year-on-year after deducting R&D expenses, which was well controlled. The net profit margin level of 1H24 is 2.86%, +0.08ppt year on year. We believe that with the optimization of the company's revenue structure and the improvement of R&D capabilities, the annual profit margin level is expected to increase year-on-year.

Free cash flow was pressured by the increase in accounts receivable, and the company guided a steady increase in dividends per share. 1H24's free cash flow was -2.165 billion yuan (1H23 was -1.122 billion yuan), mainly due to a 16.1% year-on-year increase in total accounts receivable and contract assets. More than 90% of the company's accounts receivable are within one year; the company said it will continue to adhere to the business philosophy of reasonable profit and profit matching cash, and refine accounts receivable assessment and liability reward and punishment mechanisms. The company guidelines distribute a steady increase in dividends per share to shareholders. The current closing price corresponds to a 2024E 6.1% dividend rate, which we believe has certain valuation appeal.

Profit forecasting and valuation

Considering that revenue from the company's product distribution business declined a lot, we slightly lowered 2024/25 revenue by 1.0/ 1.7% to 154.5 billion/ 160.5 billion yuan, but considering that the business had little impact on net profit and kept the 2024 net profit forecast basically unchanged, slightly reducing net profit for 25 by 1% to 3.922 billion yuan. The current price corresponds to 2024/25 6.9/6.4x price-earnings ratio. Maintaining an outperforming industry rating and a target price of HK$4.7, corresponding to a price-earnings ratio of 7.8/7.3x in 2024/25, with 13.0% upside compared to the current price.

risks

The impact of fluctuations in downstream demand exceeds expectations; the risk of extended accounts receivable periods.